Is Pharma Profiting Too Much from Medicare Part D?

Wednesday, April 2, 2008

PHILADELPHIA (March 27, 2008) – People say the pharmaceutical industry is out to make money. And health care expert Edward Balotsky, Ph.D., agrees: "It's true;" he said, "and particularly in response to Medicare Part D coverage, concern has been raised that pharmaceutical companies might raise prices for drugs that are most often used by the elderly."

But in his research published by the Journal of Business Ethics, Balotsky concludes that based upon the impact of the original Medicare program on the healthcare system, a price maximization strategy yields a utilitarian effect: "The benefits of increased access and diffusion of drugs to the health care consumer should counterbalance inequities in how the industry is financed by Medicare Part D," he said.

Soon after President Bush introduced Medicare Part D in January 2006, the American Association of Retired Persons (AARP) and Families USA began monitoring the pharmaceutical industry's response to the program. These organizations investigated manufacturer prices for the top 193 prescription drugs most commonly used by Medicare Part D recipients. And AARP found that the cost of these drugs increased by 3.5 percent during the first three months after the prescription drug plan was approved.

Balotsky, a management professor at Saint Joseph's University in Philadelphia and a former hospital CEO, was intrigued by the ethical implications the AARP's findings presented. "I was interested in finding out if the increased revenues generated by the original Medicare program resulted in more services for the elderly, the expansion of hospitals, innovation, improvements in technology, and ultimately the diffusion of these benefits throughout society" he said. "I essentially wanted to learn whether patients were any better off."

To conduct his research, Balotsky evaluated the perspectives of three stakeholder groups: the elderly, as the consumers of prescription drugs; the pharmaceutical industry, as manufacturers of the product and beneficiaries of derived profits; and the total U.S. population, as the actual payer for the Medicare Part D program through tax revenues.

His research suggests that even though there are ethical implications in that taxpayers contribute to the government prescription plan and do not immediately reap its benefits, society is better off because of the improvements made in health care since Medicare was introduced.

"The elderly garner increased access to existing products and the potential benefits from innovation-driven services. Society as a whole has the same advantages, but is saddled with extra expense because a disproportionate share of industry costs are passed on to the general population through cost shifting," Balotsky admitted. "However, a price maximization strategy, although not fair to every stakeholder, provides the opportunity to assist the greatest number of people."

In listing some of the benefits of the prescription drug plan, Balotsky says the elderly experience less economic discrimination and receive improved access to prescription medications because there is now a guaranteed source of payment for these products. Another benefit to the elderly is the option to participate in Medicare Part D with either the standard government plan or a packaged plan provided by a private insurer.

Cognizant of the flaws in Medicare Part D, Balotsky acknowledges that navigating the different plan options is often a complicated process for seniors. He also recognizes the uncertainty of whether or not there will be funding for the plan when the first baby boomers turn 65 in 2015. "Medicare Part D is potentially the largest and most expensive addition to Medicare coverage," he pointed out. "Many are fearful this generation will bankrupt the system."

Balotsky warns that until this issue of funding for Medicare and its prescription drug plan is addressed, the U.S. risks stifling health care innovation and technology. "In the long run, if pharmaceutical companies aren't profiting, neither will the health care consumer," he concluded.

Balotsky is an assistant professor of management at Saint Joseph's University. His research: "Where Strategy and Ethics Converge: Pharmaceutical Industry Pricing Policy for Medicare Part D Beneficiaries" was recently published in the Journal of Business Ethics. He is an expert on the impact of managed care on the U.S. health care system and spent 12 years as a hospital administrator both domestically and internationally. He is available for comment at 610-660-1447 or edward.balotsky@sju.edu.

Media Contact

Carolyn Steigleman, Associate Director of University Communications, csteigle@sju.edu, 610-660-1355




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